Is there really a retirement savings crisis?

Gayle B. Ronan • E-mail

“Crisis seems like such a harsh word,” says Michael Kitces, director of financial planning with the Pinnacle Advisory Group in Columbia, MD, when asked if he thinks there is a retirement savings crisis.

Yet, crisis is how the Center for Retirement Research at Boston College (CRR) characterizes the current state of retirement savings in its latest study.  It concludes: “nearly 45 percent of Americans will be ‘at risk’ of being unable to maintain their  standard of living in retirement.” 

While frighteningly high, it does imply that the statistical majority is on the right track to retirement.

Also somewhat encouraging: “Those currently in retirement or new to it, are actually doing fairly well,” says Andrew Eschtruth, spokesperson for CRR.  Among pre-retirees — early Baby Boomers — CRR finds only 35 percent are considered ‘at risk’ of reducing their lifestyles in retirement. Those farthest away from retirement, Generation Xers, are most ‘at risk,’ with 49 percent on the path to shopping in the cat food aisle. But they also have the most time to make amends in their savings strategy and catch up.

Working our way out of  a crisis
The CRR study assumes retirement occurs at age 65 with no further wage earning.  That assumption raises the amount of savings required to keep standards of living level in retirement.

But a recent report from the Employee Benefit Research Institute (EBRI) finds an increasing percentage of Americans work past the traditional retirement age. The percentage of those aged 65 to 69 still on the job in 2006 rose to 29 percent from 18 percent in 1985. EBRI says these are not just part-timers, but include full-time, full-year workers. Whether it is for continued access to health care coverage, for financial reasons, or for the mental stimulation is unclear, but EBRI sees this trend building.

“Working longer does make a significant difference [in retirement savings preparedness],” says Eschtruth.  “Just two or three additional years at the same income level lowers our study’s overall ‘at risk’ scores from 43 percent to 33 percent.”

Why Gen X lags
Current retirees make retirement financing look deceptively easy.  Partly, observes Eschtruth, because they began receiving full Social Security benefits while still in their early- to mid-sixties. Future retirees will not qualify for full benefits until their mid-to-late sixties or after the ‘retirement age’ of 65 — assuming Social Security remains intact.

Many of today’s retirees are also receiving something few Gen Xers will — a company pension.  Current retirees are also likely to have old-fashion personal savings accounts and insurance along with their 401(k) or IRA accounts. 

The lack of this variety of retirement funding sources is what creates the pressure for younger generations to save more. But, Eschtruth says CCR data finds few of today’s savers meeting this challenge by saving outside of their 401(k) accounts.

Within those 401(k) accounts, however, balances are growing. Among those who consistently saved money in 401 (k) plans between 1999 and 2006, balances averaged $121,202 versus $67,760 at year-end according to EBRI.  Median balances among that same group are up to $66,650 from $24,898 over that same seven year period. 

While it is easy to conclude Americans are not saving enough, some financial planners think confusion over what ‘enough’ is, gets some of the blame.

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